A-REIT sector trading down on ASX; Here’s why?

A-REIT and ASX 200 Real Estate sector was the top loser on 02 November 2022. The sector dropped over 1.6% by the end of the trading session. The performance of both indices was probably driven by the media release by the Australian Bureau of Statistics (ABS). In this article we will try to understand the factors influencing the sector.

Drop in Building approval in September 2022:

On 02 November 2022, ABS, via its media release, announced a drop in the total number of dwellings approved by 5.8% in September 2022, following an ~23% increase in August 2022.

Daniel Rossi, the Director of Construction Statistics at the ABS, pointed out that the drop in approval was driven by private sector houses, which dropped 7.8% during September 2022. Approvals for private sector dwellings apart from houses fell 1.8%.

There was also a decline in the approval for private sector houses in all states.

Fall in the value of new loan commitments for housing

Other than the fall in dwelling approval, the Australian real-estate sector was influenced by a fall in the value of new loan commitments for housing. In September 2022, the value of new loan commitments for housing declined 8.2% to AU$25.1 billion (seasonally adjusted) after a drop of 3.4% in August 2022.

Katherine Keenan, the Finance and Wealth Spokesperson at ABS, said that the value of new owner-occupier loan commitments declined 9.3% in September 2022, while the value of new investor loan commitments dropped 6%.

In 4 consecutive months, there has been a drop in housing lending. However, it remained well above pre-pandemic levels in September 2022. Owner-occupier loans in September were 23% above February 2020.

The number of new loan commitments to owner-occupier first-home buyers slipped by 8.3% in September 2022, subsequent to an increase in August of 10.4%. The decline was seen across all states and the Australian Capital Territory. The Northern Territory number was at par with the numbers which stood during August 2022.

The value of borrower refinancing of owner-occupier housing loan commitments between lenders declined by 7.2% in September 2022. However, it was 15% above the previous corresponding period and stood at AU$11.9 billion.

Besides this, the country also witnessed a fall in the value of new loan commitments for fixed-term personal finance by 5.2% in September 2022.

What impacts the loan commitments and borrowing capacity?

Amid the existing market conditions, the rising interest rate is one of the key factors impacting property prices. Because of the rise in the interest rate, borrowers tend to borrow less from the banks. When the bank interest rate increases, the borrower will have to pay more on the borrowed amount in the form of interest. The extent of the impact will depend on the tenure and the amount borrowed.

Also, Interest rate impacts all asset prices, including housing prices. Assets are valued for what they provide us in the future. It could be in the form of dividends, coupon payments, rent, or housing services, as well as possible capital gains. With the rise in the interest rates, the amount of income at a future date is worth less today, and so an asset with a fixed future stream of payments will be worth less today. Indeed, the future cash flow may also vary with interest rates, increasing or curbing the impact on prices.

Another factor impacting borrowing is the change in mortgage interest rates. It also directly affects the borrower’s maximum loan size and actual repayments.

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